This week, the Senate is debating its version of the tax extenders bill that the House passed before the Memorial Day recess. The bill extends unemployment benefits through November (as well as some popular tax credits) and is partially offset by the closing of a few tax loopholes.
One of these loopholes has to do with carried interest, or the money that investors pay to money managers to manage hedge funds or private equity firms. Currently, such income is taxed at the lower capital gains rate, even though it is received in return for a service like any other salary or hourly wage. The Senate has, for a week now, been watering down the tax change (suggesting subjecting only 50 or 60 percent of carried interest to the higher tax rate), in an attempt to drum up conservative votes.
But Sen. Orrin Hatch (R-UT) today took to the Senate floor to proclaim that he would vote against the extenders package — and thus prevent millions of Americans from claiming unemployment benefits — because of the tax change, and dared the world to fight his analysis:
Why, then, am I planning to vote against this bill?…It is for the same reason that much of the business community is opposed to this legislation. The tax increases added to this bill will damage the economy and job creation and outweigh the benefits of extending the expired tax provisions [...]
For several years now we have heard it stated with outrage that hedge fund managers get by paying a lower tax rate on their billion dollar compensation packages than their secretaries pay on their relatively meager salaries…The simple fact is that if we increase the tax rates and change the nature of income for these partnerships, the economic hurdle rates will rise and fewer deals will get done. And if fewer deals get done, less economic activity will be generated and fewer jobs will be created. I don’t think anybody can fight that analysis.
But since Hatch is so concerned about venture capitalists shutting down their shops if the change comes to pass, I’ll turn it over to Fred Wilson, who is a venture capitalist, and wrote that “changing the taxation of the managers will not reduce the amount of capital going to productive areas”:
The sources of the capital; wealthy families, endowments, pension funds, and the like, will still put the capital in the places where they will get the highest after tax return. And these sources of capital, if they are tax payers, will still get capital gains treatment on their investments in hedge funds, buyouts, and venture capital. And the fund managers will still have to compete with each other to get access to that capital and their incentives will still be to produce the highest returns they can produce, regardless of whether they are paying capital gains or ordinary income on their fees.
As David Weidner pointed out (in the Wall Street Journal, of all places), “Wall Street’s private equity industry is going Tea Party on a new tax making its way across Capitol Hill. But don’t be fooled, this isn’t a populist movement, unless your brand of populism includes a dozen vacation homes.” Zaid Jilani also noted that opponents of the increase are making all sorts of outlandish claims about it, including that it will harm cancer patients. But taxing carried interest for what it is — income — is simply about fairness and fixing a bizarre inequity in the tax code that has no reason for existing.